Tuesday, December 20, 2016

Turkey holds rate, risk to inflation from lira, higher oil

Turkey's central bank maintained its key policy rates but said the recent depreciation of the lira's exchange rate along with higher oil prices "pose upside risks on the inflation outlook."
However, the Central Bank of the Republic of Turkey (CBRT) added that demand would help restrain the impact on inflation from the lower lira and higher oil prices and it would closely monitor developments to make a "sound assessment."
The CBRT noted the the deceleration in economic activity in the third quarter of this year but that there was a "partial recovery" in the fourth quarter and it expects the recovery to "continue at a moderate pace," helped by recent supportive measures.
Turkey's economy shrank by an annual rate of 1.8 percent in the third quarter, down from 4.5 percent in the second and first quarters, as the economy is suffering from the fallout from the failed coup attempt in July and a continued fall in tourists following terrorist attacks.
In October the number of visitors to Turkey fell to 2.45 million from 3.3 million in the same month last year, the 15th consecutive month with a decline on an annual basis. In the first 10 months of the year, the number of tourists was down 31.4 percent to 22.697 million from 33.059 million last year.
As in recent months, the central bank said future policy decisions would depend on the outlook for inflation and it was maintaining its "cautious" policy stance while keeping an eye on inflation expectations and other factors affecting consumer prices. The CBRT left its benchmark one-week repo rate steady at 8.0 percent after raising it by 50 basis points in November to curb the impact of the decline in the lira on inflation. It also left the overnight funding rate at 8.50 percent, which was raised by 25 points in November, and the overnight borrowing rate, which was unchanged last month, at 7.25 percent. The rate hike in November was the central bank's first change in rates since February 2015 and the first hike since a 550 point emergency rate hike January 2014. Beginning in March this year the CBRT slowly lowered the overnight funding rate by 250 basis points as inflation had been decelerating amidst the central bank's effort to simplify its rate structure.Turkey's inflation rate eased to 7.0 percent in November from 7.16 percent in October on lower food prices.
Along with many other emerging market currencies, Turkey's lira has fallen since the November election of Donald Trump as U.S. President on fears that global trade will be impacted. In addition, the lira has been hit by investors' nervousness over the government's purge of state employees and others in the wake of the failed coup attempt in July and doubts the central bank would be able to act independently in the face of pressure from politicians to keep rates low.
Since late September the lira has fallen sharply and hit a new record low of 3.56 to the U.S. dollar on Dec. 5. Since then it has traded sideways and was quoted at 3.52 today, down 18 percent this year.

The Central Bank of the Republic of Turkey issued the following statement:

Recently released data indicate that the economic activity has decelerated in the third quarter, before posting a partial recovery for the final quarter. Demand from the European Union economies continues to contribute positively to exports. With the supportive measures and incentives provided recently, the recovery in the economic activity is expected to continue at a moderate pace. The Committee assesses that the implementation of the structural reforms would contribute to the potential growth significantly.

Exchange rate movements due to recently heightened global uncertainty and the increase in oil prices pose upside risks on the inflation outlook. Yet, the aggregate demand developments restrain these effects. Developments will be closely monitored in order to make a sound assessment regarding the net impact of these factors.

Future monetary policy decisions will be conditional on the inflation outlook. Inflation expectations, pricing behavior and other factors affecting inflation will be closely monitored and the cautious monetary policy stance will be maintained.

It should be emphasized that any new data or information may lead the Committee to revise its stance.

The summary of the Monetary Policy Committee Meeting will be released within five working days."